Pages

Businesses need financing at one stage of its
development. It could be startup funds, growth, expansion, fixed or working
capital.

The type of loan facility depends on the need. Long term
loans are ideal for equipment purchase, real estate ventures or huge contracts.
Short loans are preferable as working capital or emergency funds.

Short
and Long Term Loans

Finance
Sources

There are several ways businesses get finance. They could
use personal savings or borrow from friends and family.

Other ways include getting investors, crowdfunding and
sale of equity. More are through bank loans, contributory schemes and
partnership arrangement. The most common type of fundraising is through bank
loans.

A loan is a borrowed sum to be paid back at a later date.
The loan generally attracts interest on the said sum.

The pre-determined payback period is the maturity date
and the interest that it incurs may have a fixed or variable rate. The bank
loans are either short term or long term loans.

Duration
of Loans

The duration of loans fall into long and short term loans.
The repayment period determines the category of the loan.

A loan could run for three months to one year or more.
Loans that have maturity periods not exceeding one year are referred to as
short term loans.

A long term loan could range from one year six months to
ten years. The terms of servicing the loans vary based on different parameters.
There are different advantages and disadvantages between long and short term
loans.

Long
term Loans

Any loan with maturity beyond one year s regarded as long
term loan. There are loans that mature in ten or twenty years depending on the
instrument.

Long term loans are ideal for long term projects such as commercial
property loans. Other purposes include expansion, purchase of property and
equipment. The loan could be used for fixed assets, plant or franchising.

Why
take a Long Term Loan

There are many advantages to long term loans. The
applicant has a long repayment period and flexible monthly payment. Long term
loans attract lower interest and ideal for big projects.

Disadvantages
of Long Term Loans

There are more challenges associated with long term loans
and the application process. The huge sum involves more stringent rules, higher
risk and longer term interests.

The loan presents a higher volume restricts on monthly
cash flow. The company needs to service the loan with regular payment to avoid
default penalties.

Short
Term Loans

Once the interest and principle is redeemable within a
year the loan is regarded s short termed. Short term loans are ideal for
working capital and operational expenses.

Other reasons include purchase of supplies, staff wages
or emergency funding. The application process is less strict, quicker and
easier.

The borrower faces fewer restrictions, fast approval and less
documentation. There is less risk because of the small amount borrowed. The major
disadvantages are higher interest rate and a cycle of repeat borrowing.